Loss of Trademark Rights Through Naked Licensing

August 9, 2012, 9:53 AM

Owners of valuable trademarks and service marks routinely focus on protecting those rights against unauthorized use by others. However, less attention is paid to the potential for inadvertent loss of rights in trademarks when their use by third parties is authorized without a proper license agreement giving the owner adequate control over the third parties' use of its trademarks.

Some excerpts from a couple of fairly recent federal court decisions are helpful to understanding the nature and consequences of such "naked licensing" of trademarks.

First, from a 2010 Ninth Circuit Court of Appeals decision ruling that the owner's rights in its trademark had been effectively abandoned through uncontrolled licensing:

"Naked licensing" occurs when the licensor fails to execute adequate quality control over the licensee. Naked licensing may result in the trademark's ceasing to function as a symbol of quality and a controlled source. [N]aked licensing is inherently deceptive and constitutes abandonment of any rights to the trademark by the licensor. Consequently, whether the licensor fails to exercise adequate quality control over the licensee, a court may find that the trademark owner has abandoned the trademark, in which case the owner would be estopped from asserting rights to the trademark.
FreecycleSunnyvale v. The Freecycle Network (United States Court of Appeals for the Ninth Circuit, 2010) (quotation marks and citations deleted).

And, in a similar ruling by the Seventh Circuit of Appeals in 2011:

Trademark law requires that decision making authority over quality remains with the owner of the mark. How much authority is enough can't be answered generally; the nature of the business, and customers' expectations, both matter. Ours is the extreme case. Plaintiffs [the trademark owners] had, and exercised, no authority over the appearance and operations of defendants' [third party users of the trademarks] business, or even over what inventory to carry or avoid. That is the paradigm of a naked license.
Eva's Bridal Ltd. v. Halanick Enterprises, Inc. (United States Court of Appeals for the Seventh Circuit, 2011) (quotations and citations deleted).

While the exact legal basis for the naked licensing doctrine can be debated, these and other court decisions make it very clear that trademark owners should never authorize someone else to use their trademarks without a written license agreement giving them sufficient control over the use of their marks by the licensee and over the quality of goods and services sold or provided by the licensee under the marks.

The key thing to remember is that any authorized use of your trademarks or service marks by others should be done under appropriate written license agreements. While it may be easier and more convenient to not require a written license agreement or to require one that doesn't adequately address the control issue the potential for consequent loss of trademark rights under the naked licensing doctrine far outweighs any benefit one might think would be gained from taking either of these shortcuts. --Robert E. Smartschan